If the combination of extreme drought and historically hot temperatures isn't giving farmers enough to worry about this summer, sweeping changes to the federal wealth transfer tax system are looming large. Yet, many family farmers are not aware of the full implications of these possible changes - including losing their farms.

"Few farmers fully understand there is a limit to the amount of wealth that can be transferred from generation to generation, and those who don't take advantage of the current tax environment could be forced to sell their land to pay the estate taxes on that very land," says Milwaukee-based estate planning attorney Eido Walny. "Since the IRS does not differentiate between wealth held in the form of cash versus land, equipment, or other forms, a farmer with a $2 million farm is treated the same as a Wall Street banker with $2 million cash in the bank."

According to the USDA, about 98 percent of all farms in the United States are family farms and about 70 percent of the nation's farmland will change hands in the next two decades. Yet, 89 percentof farmers don't have a farm succession plan. Of immediate concern, Walny says, is the possibility that the federal wealth transfer tax system may reset to 2001 levels ending a historic opportunity for family farmers to do appropriate succession planning.

Under current law, each individual has a $5.12 million federal estate tax exemption, meaning that up to $5.12 million worth of assets can be passed to heirs free of estate tax. Anything in excess of that value will be taxed at a rate of 35 percent. Unless Congress acts, that estate tax exemption will fall from $5.12 million to $1 million effective January 1, 2013, and the tax will rise from 35 percent to 55 percent. That means, for example, a $5.12 million transfer would incur no taxes in 2012, but $2,266,000 in taxes in 2013 and beyond.

Because estate taxes must be paid within nine months of a person's death, often survivors are forced to sell assets or property for significantly less than full market value in a scramble to pay those taxes. The solution, says Walny, is to take advantage of the window of opportunity between now and the end of the year to develop a solid succession plan regardless of what federal changes might be at hand.

"A great option for many family farmers is to implement a trust -- or series of trusts -- to which the farm can be transferred," Walny says. "A trust can address issues of income and land control, as well as offer asset protection benefits that are not available when people simply make outright gifts of their land. And, perhaps most importantly, a well-drafted trust can protect the farm from exposure to estate taxes for many generations to come."

Because of the complex nature and number of documents and transactions necessary to establish an appropriate trust -- and with possible sweeping changes coming to the federal wealth transfer tax system -- Walny urges family farmers to act now to begin the succession planning process.